Grandfathering Gone for many: Actuarial rates will apply for new or lapsed policies, business structures and second homes

Feb 8th, 2013 | By | Category: Top Story

On March 26, a FEMA Open House will give St. Bernard residents and business owners a chance to view the new National Flood Insurance Program elevation maps. Thanks to the protection of the newly completed
Hurricane Risk Reduction System, base flood elevations (BFE) in many St. Bernard neighborhoods will be decreasing. But there are a few areas both in and outside levee protection that will see BFE increases.

Additionally, FEMA wants residents to know that a BFE decrease does not automatically equate to a decrease in insurance rates. This is due to the sweeping legislation passed in July 2012 that completely reforms the National Flood Insurance Program in order to pay back the $27.45 billion owed to the federal government and renew the program for another five years.

FEMA officials sent to the area to explain the changes to the National Flood Insurance Program (NFIP) say the legislation, known as the Biggert-Waters Act, is the only way to keep the NFIP afloat. Some of those changes include the elimination of subsidized rates and grandfathered rates on properties; the revision of rates in Special Flood Hazard Areas (coastal floodplains, floodplains along major rivers, and areas subject to flooding from water collection in a low-lying area) over a five-year period to reflect actual flood risk, among other changes.

10 years to repay $27.45 billion

With $27.45 billion of debt to the federal government, and a few lapses over the years, lawmakers decided that in order to keep the National Flood Insurance Program, NFIP, viable, the system needed to be revamped.

The Biggert-Waters Reform Act of 2012 keeps the NFIP operational until 2017. It passed the House by a vote of 373-52, and the Senate by a vote of 74-19; and on July 6, 2012, President Obama signed it into law.
At that point the program was in debt for $17.75 billion, with a $20 billion borrowing authority.

In August Hurricane Isaac hit Louisiana, and in October Super Storm Sandy hit New York and New Jersey.
On January 4, 2013, the House and Senate passed an additional $9.7 billion for Sandy flood claims. The Biggert-Waters Act raised the NFIP borrowing authority to $30 billion.

The Sandy loan plus the past loans brought the total amount Congress is requiring NFIP to pay back to $27.45 billion. FEMA officials in Washington D.C. said that Congress has asked for a plan to repay the debt within 10 years. That equates to approximately $2.75 billion per year on the money borrowed todate.
FEMA officials noted that the move to actuarial rates is to bring the amount taken in from policy holders to the amount expected to be paid out for each year. Because flooding is so unpredictable, some years the program may break even, other years there may be a deficit, and still other years there may be no major claims events and some of the debt will be paid back.

Who is exempt?

According to FEMA, there are some lucky area policy holders who will be exempt from actuarial rates, rates based on actual risk. Basically, primary residences, except for those expressly called out by the legislation, will not see actuarial rates, said a FEMA official.
Those categories of primary residences that will see actuarial rates are:
• New policies
• Policies that were allowed to lapse
• Properties purchased after July 6, 2012- flood insurance policies can no longer be transferred to new owners when the property is sold
• Secondary or non-primary homes (homes lived in less than 185 days per year)
• Severe Repetitive Loss Property
• Business properties
• Any property that has incurred flood-related damage in which the cumulative amounts of NFIP Flood Insurance Claim Payments (paid flood claims) equaled or exceeded the fair market value of the property.
• Preferred Risk Policies- a policy that offers fixed combinations of building/contents coverage, or contents-only coverage, at modest fixed premiums and are located in moderate-to-low risk areas (B, C, and
X Zones)

Grandfathering Gone

When flood map changes occurred, the NFIP provided a lower-cost flood insurance rating option known as “grandfathering.” There were two classifications of grandfathering available for property owners:
1- Zone Grandfathering- If the property owner had a flood insurance policy in effect when the new flood zones became effective, and then maintained continuous coverage.
2- Elevation Grandfathering- If the property owner had built in compliance with the FIRM, Flood Insurance Rate Map that dictates the Base Flood Elevations, in effect at the time of construction.
Biggert-Waters Act phases out these grandfathering options for some policy holders.
New structures were to be built to the base flood elevation standards in place at the time of
construction.

Since the passage of Biggert-Waters, grandfathering is scheduled to be completely phased out for all but the
least risky policy holders, businesses and non-primary residences. Insurance rates will be based on whether
your structure is above, below or at the new BFE height.

These heights were determined by FEMA and will be given to the St. Bernard Parish Council to be adopted this year. (See later section entitled Council Options.) If you are at compliance level, you will have a zero-rating, and pay only your updated rate.

If you are in a 10-foot elevation zone, but your structure is only raised 3-feet, you will pay a -7 rating, which
will cost more than the zero-rating. On the flip side, if you own a structure 15-feet off the ground in a 10-foot elevation zone, you would have a +5 rating, and would be charged less than the base flood elevation zero-rating.

FEMA gives the example of a pre-FIRM home with $200,000 in building coverage, in an AE flood zone.
The premium prior to elevation is $1,644. The premium at an elevation of +1 BFE is $612. The premium at an elevation of +3 BFE is $338. FEMA notes that the figures are based on a standard deductible with no Community Rating System, CRS, discount.

Rate Increases Phased in

As is the case now, the inclusion of most of St. Bernard Parish in the metro area Hurricane Risk Reduction System has caused a decrease of base flood elevations for most, with some areas seeing a slight increase. Although most areas inside the Hurricane Risk Reduction System have seen base flood elevations decrease, this does not necessarily mean a decrease in annual premiums. On the contrary, some policies both inside and outside levee protection will see change.

The new Base Flood Elevations are part of the established re-evaluation process. If a neighborhood’s BFEs
decrease, homeowners should not expect their annual flood insurance premium to also decrease. According to FEMA officials, the new law calls for certain subsidized rates to be phased out at a rate of 25 percent
per year until an average actuarial rate is hit, whether it takes two years or ten.

Insurance companies can quote a new actuarial rate estimate once they are released in May 2013. So, if your 2012 flood insurance cost is $1,000 per year, and your new actuarial rate brings the cost up to $3,051, your annual premium will be increased by 25 percent each year until you reach the new total: $1,250 the first year; $1,562.50 the second year; $1,953.13 the third year; $2,441.41 for the fourth year; and $3,051.76 the fifth year. This 25 percent will keep getting added to your premium until you reach your actuarial rate estimate, in this case, five years.

Dates of Enactment

The Biggert-Waters Act had an ambitious schedule of implementation that was supposed to have started August 6, 2012— 30 days after President Obama signed it into law. But the schedule did not take into account the amount of time needed to implement the conversion from grandfathered rates to actuarial rates. FEMA officials say that the only policies fully implemented under the new changes are secondary/non-primary homes.

Actuarial ratings will take the place of the grandfathering system in the below scheduled phases. All of these
phases will be implemented over the next four years at 25 percent increases until the full actuarial rate is met.

August 6, 2012:
• New policies
• Policies that were allowed to lapse
• Properties purchased after July 6, 2012- flood insurance policies can no longer be transferred to new owners when the property is sold
January 1, 2013:
• Secondary or non-primary homes (homes lived in less than 185 days)
(FEMA reports that secondary/non-primary home policies are the only policies that have switched fully to actuarial ratings.)
Fall 2013:
• Severe Repetitive Loss Property
• Business properties
• Any property that has incurred flood-related damage in which the cumulative mounts of NFIP Flood Insurance Claim Payments (paid flood claims) equaled or exceeded the fair market value of the property.
2014:
• Preferred Policies- that are located in moderate-to-low risk areas (B, C, and X Zones).
Local insurance agent Richie Clements, who also serves Vice President and Treasurer of the National Association of Professional Insurance Agents says that he has seen increases for his Preferred Rated Policy holders (those in X, B and C zones) twice in the past six months.

“Preferred Rated Policies will increase from $365 last year (2012) to $412 for the maximum limits of $250,000 on the Building and $100,000 on contents for Residential policies. Business policies will increase from $2,547 to $2,878 for the maximum of $500,000 Building and $500,000 contents,” said Clements. “I’m not sure how many people are going to see a decrease; we are anticipating a 10 percent increase every time they roll out a new phase of this.”

Base Flood Elevations
St. Bernard Parish’s base flood elevation map is a patchwork of updates throughout the years. The first map was made at the start of the flood program, but over the years, parts have been updated while others remain
the same. As areas of the parish grew, the location of those new developments were reevaluated and new elevations were adopted, but some are still dated.

“Some of these maps are of 1985 vintage,” said FEMA Mitigation Specialist Tom McDermott. “Things have changed.”

“A lot inside the levee system is not changing, but some areas, even inside levee protection, could see an increase,” explained Clements.

Parish Council Options

Preliminary maps have been published on the FEMA website www.riskmap6.com; they are the new base flood elevations that each parish will have to adopt into code.

At some point soon, FEMA will publish a notice of proposed flood hazard determinations in the Federal Register and notify St. Bernard Parish President Dave Peralta of the determination. FEMA will then publish information about the flood hazard determination at least twice in The St. Bernard Voice, St. Bernard Parish’s official public journal.

Then the St. Bernard Parish Council will have a 90 day appeal period. This period is strictly to address: 1-mistakes in calculation, i.e. if a piece of measuring equipment used to determine the new elevations was faulty in some way; and 2- typos or wrong information, i.e. if a street name is wrong.

After the appeal period, the parish has a six-month period to adopt the maps. If the maps are not adopted by
the council, there is a year-one penalty: policy holders will each be charged an extra $100 when renewing his
or her policy.

If not adopted the second year, the parish goes into suspension and all policy holders within St. Bernard will
be denied coverage with the National Flood Insurance Program.

The NFIP maps will be available for viewing on March 28 in the council chambers, 3201 W. Judge Perez Dr.,
from 2 to 7 p.m. FEMA and Risk Map 6 officials will be on-hand during the Open House.

One Comment to “Grandfathering Gone for many: Actuarial rates will apply for new or lapsed policies, business structures and second homes”

  1. [...] in the event of the inevitable flooding caused by rising sea levels? And how, exactly, does that effect your actuarial [...]

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